Reason for Report : 1Q18 Earnings Flash

Reason for Report : 1Q18 Earnings Flash

Raytheon Co.

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(RTN - NYSE)

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$211.07

Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: 1Q18 Earnings Flash.

Prev. Ed: 4Q17 Earnings Update done on Mar 28, 2018.

Flash Update [Note: earnings update in progress; final report to follow]

On Apr 26, 2018, Raytheon Company reported first-quarter 2018 earnings from continuing operations of $2.20 per share, beating the Zacks Consensus Estimate of $2.10 by 4.8%. The reported figure also came in higher than the year-ago quarter’s earnings of $1.73 per share by 27.2%.

The year-over-year upside in earnings was driven by operational improvements and lower taxes.

Operational Performance

The company’s first-quarter revenues of $6,267 million witnessed 4.5% year-over-year growth. The reported number also surpassed the Zacks Consensus Estimate of $6,173.2 million by 1.5%.

Raytheon’s bookings in the first quarter were $6,311 million compared with $5,688 million in the year-ago quarter, reflecting a rise of 11%. Total backlog at the end of first-quarter was $38.1 billion, compared to $38.2 billion at the end of 2017.

Total operating expenses increased 3.4% to $5,226 million in the first quarter. Operating income of $1,041 million improved 9.8% from $1,041 million a year ago.

Segmental Performance

Integrated Defense Systems: The segment’s revenues grew 7% year over year to $1,489 million due to higher sales from an international Patriot program awarded in the first quarter 2018. Operating income increased to $273 million from $212 million.

Intelligence, Information and Services: The segment’s revenues of $1,582 million were higher than the year-ago level of $1,507 million by 5%, on account of higher net sales on classified and training programs. Operating income in the reported quarter increased to $117 million from $111 million a year ago.

Missile Systems: Segment revenues grew 5% to $1,848 million from $1,756 million a year ago, driven by higher net sales on classified programs. Operating income declined to $212 million from $216 million a year ago.

Space and Airborne Systems: Revenues in the quarter inched up 1% to $1,568 million. Operating income rose 2% to $193 million.

Forcepoint: This commercial cyber-security segment generated net sales of $141 million in the first quarter, down from $144 million a year ago. The joint-venture entity incurred operating loss of $7 million in the quarter, as against the year-ago operating income figure of $16 million.

Financial Update

Raytheon ended first-quarter with cash and cash equivalents of $2,748 million, down from $3,103 million as of Dec 31, 2017. Long-term debt was $4,751 million, almost in line with $4,750 million as of Dec 31, 2017.

Operating cash inflow from continuing operations was $283 million at the end of first quarter compared with cash outflow of $41 million in the year-ago quarter.

In the quarter under review, Raytheon repurchased 1.9 million shares of common stock for $400 million. Moreover, the company has hiked the annual dividend rate by 8.8% to $3.47 per share, which marked the 14th consecutive annual dividend increase.

Guidance
Raytheon raised its guidance for 2018. The company currently expects to generate net sales in the range of $26.5-$27.0 billion, compared to earlier band of $26.4 to $26.9 billion, in 2018.

On the bottom-line front, Raytheon now expects to deliver earnings per share in the range of $9.70-$9.90, up from prior range of $9.55-$9.75. The company however reiterated its cash flow from operating activities guidance in the range of $3.6-$4 billion during 2018.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON RTN

Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]

Raytheon Company engages in the design, development, manufacture, integration and support of technological products, services and solutions for governmental and commercial customers in the U.S. as well as other countries.

All the 13 firms covering the stock assigned positive ratings. While 12 out of them rendered positive outlook, only one gave a neutral views. Notably, none of the firms had a negative outlook on the stock. Target prices range from $199 ( 7.2% downside from the current price) to $265 ( 23.6% upside from the current price). The Digest average is $231.67 ( $29.81 from the previous report; 8.1% upside from the current price).

Bullish (Positive or Equivalent): (92.31%; 12/13 firms) – The bullish firms are of the opinion that Raytheon is favourably is positioned to benefit from increased spending by the Defence of Department (DoD) in both modernization and readiness accounts owing to its well-balanced product mix. They view the stock’s favourable mix of munitions (missiles) and radars (missile defence) solutions to aid the company to perform well going forward. Additionally, they believe international backlog remains strong, due to large international bookings which continue to exceed international sales.

Cautious (Neutral or Equivalent): (7.69%; 1/13 firms)

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Overview [Note: Only highlighted material has been changed.]

Key investment considerations as identified by the analysts are as follows:

Key Positive Arguments / Key Negative Arguments
  • With a large percentage of the company’s revenues coming from the defense industry, it will benefit even if new platforms are canceled or deferred, as it usually supplies upgrades to legacy platforms.
  • Strong international sales are expected to boost top-line growth in the coming years.
  • Wide range of combat-proven defense products aids in attracting orders from both Pentagon and foreign allies of the nation. This can be attributed for the consistent performance over the years.
  • A robust balance sheet is expected to support additional share buybacks and cash deployments.
  • Raytheon|Websense (RW) provides unified web, email, mobile and data security solutions globally for protecting an organization's data and users from external and internal threats.
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  • The company operates in a highly competitive market. Some competitors may have more extensive or specialized business segments. On the other hand, some customers might develop their own products and compete directly with the company for sales.
  • The company’s operations are exposed to risks including delays in international weapons systems and potential program cancellations. These events can lead to disruptions in technology and raise costs.
  • Change in the federal government’s budgetary priorities or a shift in spending, apart from programs that the company supports, could adversely affect its business.

Based in Massachusetts, Raytheon Company is one of the largest aerospace and defense companies in the U.S. with a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipments, communication and information systems, naval systems, air traffic control systems, and technical services.

The company operates through five business segments, namely, Intelligence, Information and Services; Integrated Defense Systems; Missile Systems; Space and Airborne Systems; and Forcepoint (formerly known as Raytheon|Websense). Total backlog at the end of the fourth quarter was $34.7 billion (up $1.1 billion a year-ago).

Intelligence, Information and Services (IIS) offers cyber security services. It also provides a wide array of training, space, logistics and engineering solutions for government and civilian customers. It focuses in ISR.

Integrated Defense Systems (IDS) mainly provides air and missile defense, large land- and sea-based radars and systems for managing command, control, communications, computers, cyber and intelligence (C5I). It also makes air traffic management systems, sonars, torpedoes and electronic systems for ships.

Missile Systems (MS) designs, develops, and produces missile systems for critical requirements, including air-to-air strikes, surface navy air defense, land combat missiles, guided projectiles and directed energy weapons. This segment mainly caters to the U.S. Navy, Army, Air Force and Marine Corps, and the armed forces of more than 40 countries.

Space and Airborne Systems (SAS) manufactures radars and other sensors for aircraft, spacecraft and ships. The unit also offers communications and electronic warfare solutions and performs research in areas ranging from linguistics to quantum computing.

Forcepoint provides unified web, email, mobile and data security solutions globally for protecting an organization's data and users from external and internal threats. Effective Jan 1, 2017, Forcepoint has reorganized into the following principal product lines: Data and Insider Threat Security; Cloud Security; Global Governments; and Network Security. This structure reflects the reorganization of Forcepoint’s broad portfolio of cybersecurity products into focused technology and market categories.

The company’s fiscal year coincides with the calendar year. For more information on the company, please visit

Nov 20, 2017

Long-Term Growth [Note: Only highlighted material has been changed.]

Growth of the aerospace and defense industry depends largely on the spending outlook of the government departments, with the U.S. defense budget being the primary driver. The U.S. is the world’s largest aerospace and defense market and has the biggest military budget in the world. Raytheon is one of the largest aerospace and defense companies in the U.S. with a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services.

The company is however facing intense competition in light of the ongoing consolidation among the U.S. and global defense operators. Nevertheless, the company strives to remain competitive in the coming years by expanding into new markets and building a global supply chain. The company also competes in the commercial cybersecurity market, which is characterized by rapid changes in technology, products, customer specifications and industry standards. However, demand for its products remains strong, especially in the areas of integrated air and missile defense.

The company has also been identifying additional opportunities to drive cost savings by streamlining product lines and reducing fixed costs. Going forward, the company sees additional product synergies. It considers itself well positioned to address opportunities and challenges in the industry with a diverse portfolio comprising innovative technologies. It remains focused on delivering the best value to its customers and shareholders in the long term.

Demand for Raytheon’s capabilities related to missiles and missile defense is strong and likely to get even stronger over the next few years. The company's missile programs to drive the segmental margins of the company going forward. They believe that the company is poised to benefit from larger defense contracts and programs, driven by higher operating incomes primarily from the Integrated Defense Systems (IDS) and Intelligence and Information Services (IIS) segments. IDS margins can expand driven by favorable mix. Missile Systems should also benefit from higher volumes. Margin also expected to expand due to opportunities in the international market, as international (e.g., Patriot) work mature. This is likely to drive the operating income of the company, in coming quarters.

Raytheon has a distinct focus on its overseas business. Foreign military contracts continue to be vital growth drivers for the company. In particular, rising demand from the Gulf countries as well as the Asia-Pacific region is expected to drive the company’s top-line growth. This mix is likely to support Raytheon's overall industry-leading margin performance, going forward. Apart from that, new opportunities in Asia as well as competitive awards in Europe continue to develop.

Mar 28, 2018

Target Price/Valuation [Note: Only highlighted material has been changed.]

Rating Distribution
Positive / 92.31% 
Neutral / 7.69% 
Negative / 0.0%
Avg. Target Price / $231.67 
Highest Target Price / $265.00 
Lowest Target Price / $199.00 
Analysts with Target Price/Total / 12/13

Risks to the target price include future levels of domestic and international military spending, delays in international awards, cuts in the U.S. defense budget, political risks associated with the funding of specific programs, contract execution risk, changes to export regulations, pension returns/discount rates, the company’s ability to compete and win contracts, management changes, acquisition/integration risks and decisions related to capital structure and use of cash.

Recent Events [Note: Only highlighted material has been changed.]

On Jan 28, 2018, Raytheon signed an agreement worth $4.7 billion with the government of Poland to sell its combat proven Patriot missile from the U.S. Army.

On Jan 25, 2018, Raytheon reported fourth-quarter 2017 adjusted earnings from continuing operations of $2.03 per share, beating the Zacks Consensus Estimate of $2.02 by 0.5%.

The company’s reported earnings of $1.35 per share came in below the prior-year quarter’s equivalent of $1.88, owing to the Tax Cuts and Job Acts of 2017, which had an unfavorable impact of 59 cents on earnings. Also, pre-tax discretionary pension plan contribution had an unfavorable tax-related impact of 9 cents on earnings.

On Jan 21, 2018, The Board of Directors of Raytheon Company has voted to increase the company's annual dividend payout rate by 8.8 percent, from $3.19 to $3.47 per share. The Board also authorized payment of a quarterly cash dividend of $0.8675 per outstanding share of common stock, to be paid on May 10, 2018, to shareholders of record as of the close of business on April 11, 2018.

Revenue [Note: Only highlighted material has been changed.]

Provided below is a summary of revenues for the quarter as compiled by Zacks Digest:

Revenue ($ M) / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2016A / 2017A / 2018E / 2019E
Digest High / $6,279.0 / $6,284.0 / $6,783.0 / $6,191.0 / $24,124.0 / $25,348.0 / $26,772.0 / $27,856.0
Digest Low / $6,279.0 / $6,284.0 / $6,783.0 / $6,115.0 / $24,124.0 / $25,348.0 / $26,485.0 / $27,525.0
Digest Average / $6,279.0 / $6,284.0 / $6,783.0 / $6,153.0 / $21,124.0 / $25,348.0 / $26,628.5 / $27,690.5
Y-o-Y Growth / -0.8% / 4.5% / 8% / 2.6% / 3.3% / 5.1% / 5.1% / 4.7%
Sequential Growth / 4.4% / 0.0% / 7.9% / -9.3%

The company’s fourth-quarter revenues of $6,783 million witnessed 8% year-over-year growth. The reported number however missed the Zacks Consensus Estimate of $6,833.7 million by 0.7%.

The company reported full-year revenues in 2017 to be $25.3 billion, up 5.1% as compared to $24.1 billion in 2016.

Bookings

Raytheon’s bookings in the fourth quarter were $8,541 million compared with $7,582 million in the year-ago quarter, reflecting a rise of 12.6%. Total backlog at the end of 2017 was $38.2 billion, compared to $36.7 billion at the end of 2016.

Segment Details as per Zacks Digest:

Provided below is a summary of segment revenues for the quarter as compiled by Zacks Digest:

Segment Revenue ($ M) / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2016A / 2017A / 2018E / 2019E
Integrated Defense System(IDS) / $1,460.0 / $1,391.0 / $1,553.0 / $1,442.5 / $5,529.0 / $5,804.0 / $6,045.0  / $6,246.5
Intelligence & Information System(IIS) / $1,516.0 / $1,543.0 / $1,572.0 / $1,498.5 / $6,169.0 / $6,177.0 / $6,247.0  / $6,425.5
Missile System(MS) / $1,897.0 / $1,945.0 / $2,145.0 / $1,850.0 / $7,096.0 / $7,787.0 / $8,516.5  / $8,974.5
Space & Airborne System(SAS) / $1,600.0 / $1,597.0 / $1,670.0 / $1,571.0 / $6,182.0 / $6,430.0 / $6,615.5  / $6,815.5
Force point / $143.0 / $170.0 / $156.0 / $149.5 / $586.0 / $608.0 / $662.0  / $714.0
Intersegment elimination / ($336.6) / ($362.0) / ($353.0) / ($358.0) / ($1,437.6) / ($1,458.0) / ($1,457)  / ($1,485.0)

Integrated Defense Systems: The segment’s revenues grew 6% year over year to $1,553 million due to higher sales on an international early-warning radar program.

Intelligence, Information and Services: The segment’s revenues of $1,572 million were higher than the year-ago level of $1,516 million by 4%.

Missile Systems: Segment revenues grew 15% to $2,185 million from $1,897 million a year ago, driven by higher net sales on the Advanced Medium-Range Air-to-Air Missiles, Standard Missile-3 and Paveway programs.

Space and Airborne Systems: Revenues in the quarter improved 4% to $1,670 million.

Forcepoint: This commercial cyber-security segment generated net sales of $156 million in the fourth quarter, up from $143 million a year ago.

Guidance

Raytheon expects to generate net sales in the range of $26.4-$26.9 billion in 2018.

Outlook

The bullish firms have reiterated their 2018 revenue outlook for the company. They expect Missile Systems segment’s revenues to primarily drive the top line growth of the company.

Please refer to the Zacks Research Digest spreadsheet on RTN for more details on revenue estimates.

Margins [Note: Only highlighted material has been changed.]

Provided below is a summary of margins as compiled by Zacks Digest:

Margins / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2016A / 2017A / 2018E / 2019E
EBITDA Margin / 16.2% / 15.8% / 15% / 14.7% / 15.8% / 15.3% / 15.7%  / 16.7%
Operating Margin / 14% / 13.7% / 12.8% / 12.3% / 13.7% / 13.1% / 13.4% / 14.4%
Pretax Margin / 13.1% / 13% / 12.3% / 11.8% / 12.8% / 12.3% / 12.8%  / 13.8%
Net Margin / 8.8% / 9% / 6.8% / 9.6% / 9.2% / 8.2% / 10.4%  / 11.2%

Segment details are as follows as per Zacks Digest:

Integrated Defense Systems (IDS): Operating income of the segment increased to $247 million from $238 million.

Intelligence and Information Services (IIS): Operating income in the reported quarter dropped to $117 million from $120 million a year ago.

Missile Systems: Operating income improved to $278 million from $261 million a year ago.

Space and Airborne System (SAS): Operating income dropped 10% to $242 million.

Forcepoint: The joint-venture entity registered operating loss of $8 million in the reported quarter, compared to the year-ago operating income figure of $21 million.

Please refer to the Zacks Research Digest spreadsheet on RTN for more details on margin estimates.

Earnings per Share [Note: Only highlighted material has been changed.]

Raytheon reported fourth-quarter 2017 adjusted earnings from continuing operations of $2.03 per share, beating the Zacks Consensus Estimate of $2.02 by 0.5%.

The company’s reported earnings of $1.35 per share came in below the prior-year quarter’s equivalent of $1.88, owing to the Tax Cuts and Job Acts of 2017, which had an unfavorable impact of 59 cents on earnings. Also, pre-tax discretionary pension plan contribution had an unfavorable tax-related impact of 9 cents on earnings.

Raytheon reported full-year 2017 EPS from continuing operations was $6.94 compared to $7.55 for the full-year 2016.

Provided below is a summary of EPS as compiled by Zacks Digest:

EPS in US $ / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2016A / 2017A / 2018E / 2019E
Digest High / $1.88 / $1.97 / $2.03 / $2.10 / $7.56 / $7.63 / $9.75  / $11.05
Digest Low / $1.84 / $1.97 / $1.35 / $2.01 / $7.47 / $6.94 / $9.60  / $10.95
Digest Average / $1.86 / $1.97 / $1.69 / $2.06 / $7.52 / $7.28 / $9.68  / $11.00
Y-o-Y Growth / 1.5% / 7.3% / -14.8% / 19.1% / 11.7% / -4.7% / 34.6% / 13.7%
Sequential Growth / 2.3% / 3.9% / -18.8% / 28.5%

Guidance

The company has issued its bottom line guidance for 2018. It expects to generate earnings from continuing operations in the range of $9.55-$9.75 per share.

Outlook

The firms have raised their 2018 and 2019 earnings guidance for Raytheon, buoyed by a lower tax rate and higher pension income.

Please refer to the Zacks Research Digest spreadsheet on RTN for more details on EPS estimates.

Mar 28, 2018

Research Analyst / Sanhita Banerjee
Copy Editor
Content Ed. / Aparajita Dutta
Lead Analyst / Aparajita Dutta
QCA / Jewel Saha
No. of brokers reported/Total brokers
Reason for Update / 1Q18 Earnings Flash

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